External reserves rise by 1.52% in one week on improved oil prices

Nigeria’s external reserves have in the last one week risen by 1.52 percent to $35.35 billion as at Wednesday, December 30, 2020 compared to $34.82 billion as of Thursday December 17, 2020, according to data from the Central Bank of Nigeria (CBN).

The accretion in foreign exchange reserves is as a result of recent increase in the price oil. The price of Brent crude oil (petroleum), which has remained at about $40 per barrel, has risen to $51.11 per barrel as at 2.20 pm on Wednesday, December 30, 2020.

This, analysts believe reaffirms the firepower of the CBN to continue its defence of the local currency.

Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, attributed the increase in the foreign exchange buffers to Crude oil price recovery which has stayed above 50 dollars per barrel in recent days.

Also, he said crude oil production in the fourth quarter (Q4) may have risen above the 1.6mbpd average recorded in previous quarter (Q3).

Note that the main source of foreign reserves is crude oil sales which accounts for over 90% of the country’s forex, he said.

The immediate impact of the development on the economy, he said will be salutary on the exchange rate as the CBN is put in a stronger position to fund the forex market and stabilise the exchange rate.

“Stable Exchange rate will have a positive knock on effect on the prices of imported goods. So, I expect a moderation in core inflation rate for December especially if the accretion to external reserves is significant,” Uwaleke said.

Naira/dollar exchange rate steadied at N470 on Wednesday after weakening by 1.07 percent on Tuesday on the black market.

At the Bureau De Change (BDC) segment of the foreign exchange market, Naira strengthened by 1.05 percent or N5 to N470 on Wednesday compared to N475 per dollar since last week.

On Tuesday, Naira depreciated by 0.38 percent as the dollar was quoted at N393.50 as against the last close of N392.00 at the Investors and Exporters (I&E) forex window. Analysts at FSDH research said most participants maintained bids between N380.50 and N396.00 per dollar.

Ayodeji Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank, also said the increase in external reserves could be as a result of improvement in oil prices which has risen above $40 per barrel. “Overtime, we will continue to see that increase,” he said.

As at December 10th, External Reserves have lost 8.2% of its value since the beginning of the year, limited forex inflows due to COVID-19 exerted pressure on External Reserves in the year, according to a report by FSDH research.

The report noted that there were lower inflows from crude oil intensified in the second quarter when oil price fell significantly. Capital inflows reduced – foreign investment inflows dipped by 50.9% year on year to US$7.15 billion in 2020H1 from US$14.56 in 2019H1 and rising demand for foreign currency fuelled mainly by rising imports and capital outflows have also influenced Reserves movement.